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Mortgages crowd out business lending

Veda has released its Consumer Credit Demand Index results for the December quarter of 2013, which registered flat consumer credit demand over the year, but big growth in the number of mortgage applications, although first home buyer demand continues to fall.

According to regular commenter and mortgage broker Peter Fraser, Veda are the largest credit recording agency in Australia, and every application for any formal loan through any retail lender is recorded with them. As such, results published by Veda should be taken seriously.

According to Veda:

Overall consumer credit demand for the December quarter compared to the same period in 2012 was flat (+0.4%) year on year, representing an easing in the pace of growth from the increase of 7.4% recorded in the September quarter.

The index measures the volume of unsecured and secured credit enquiries that go through the Veda Consumer Credit Bureau by financial services credit providers in Australia.

Mortgage enquiries continued to rise, increasing by 15.3% year on year, an increase from 9.7% in the September quarter and 7.9% in the June quarter.

All states except SA saw year on year growth in the volume of mortgage enquiries in the December quarter. For the second consecutive quarter mortgage enquiries were strongest in NSW (+22.2%) with significant increases also recorded in VIC (+15.2%), QLD (+11.9%) and WA (+11.9%). Other states to experience mortgage enquiry growth were TAS (+9.8%), SA (+8.4%), ACT (+4.8%) and the NT (+2.6%).

“An extended period of low interest rates is supporting the lift in mortgage enquiries, which have stepped up a level and are now showing the strongest growth since late 2009. It is likely that we will see a continuing increase in the near term, along with sustained house price growth. We saw a further shift to mortgage applications from older demographics, with more first home buyers leaving the market,” said Angus Luffman, General Manager of Consumer Risk at Veda.

In contrast, credit card enquiries eased sharply in the December quarter. Nationally, annual growth in credit card enquiries eased to 2.4% in the December quarter, from 13.4% in the September quarter. Reduced demand for credit cards was apparent in all states with VIC (+6.9%) recording the strongest growth, followed by ACT (+6.2%), NT (+3.9%), WA (+2.6%), and NSW (+1.1%). Enquiries were flat in SA (+0.2%) and contracted in QLD (-0.2%) and (-1.0%).

“The December quarter was the second consecutive quarter of growth for credit card enquiries after an extended period of decline. Whilst it was a softer result than the previous quarter, the weeks leading up to Christmas had solid growth and 2013 ended with overall growth in credit card enquiries of 4.3%.”

Nationally, personal loan enquiries recorded a decrease of -1.4% over the year to the December quarter. The NT (+11.0%) was the only state to record year on year growth, with reduced demand apparent in NSW (-0.8%), VIC (-2.0%), QLD (-1.9%), SA (-1.6%), WA (-0.4%), TAS (-7.6%), and the ACT (-2.7%).

“Personal loans enquiries have stabilised at a much higher level after a period of strong growth. This suggests ongoing challenging conditions for retailers of big ticket items and reflects a slowdown of car sales, which have shown no growth year on year, and a reduced demand for larger purchases among consumers in the mining states.

“The December quarter is typically a strong period for credit demand, reflecting the seasonal peak in spending associated with the Christmas period. The relatively weak outcome in loans and credit cards suggests low interest rates are not leading to a significant lift in consumer borrowing as households remain cautious about rising unemployment.”

It’s worth also pointing out that the latest credit aggregates data from the Reserve Bank of Australia revealed that the share of credit flowing to mortgages hit the highest level on record (60.2%), with the share of loans flowing to business (33.4%) hitting a record low (see next chart).

This suggests that mortgage lending is crowding-out other forms of lending.

Comments

The demand from business for loans may simply be weak and there are plenty of reasons why business may be cautious about borrowing.

The main one being that Blind Freddy would have doubts about the strength of an economy:

1. Where the RBA is resorting to record low interest rates to prevent asset prices from sliding.

2. Where a historic mining boom can barely generate a trade surplus.

3. Where the Federal Govt is relying on foreign sales of govt securities to keep its cost of borrowing down.

4. Where the price of land has excluded large numbers of new entrants to the market and undermined the competitiveness of much commercial activity.

5. Where the currency has been inflated by a rush to sell public and private (residential mortgage) IOUs and hard assets to foreign buyers.

It is a surprise that there is any business demand at all for loans outside those areas of commercial activity directly related to the asset price ponzi economy being driven by RBA monetary policy and reinforced by government policy.

Isn’t there also the issue with whether the amount of HECS/HELP debt is also relevant to total credit measures. This debt has grown rapidly over the last say decade but is not lent by banks. A similar issue arises in the US.

Is there a simpler explanation?
Is it possible that businesses have lending choices that extend beyond the reach / manipulation of our big 4 banks?Maybe businesses are simply exercising these choices and thereby altering the balance of bank lending towards the captive mortgage market.

The last time I looked at bank lending in Australia they wanted me to secure the business loan with personal house or similar collateral, I said no way and that ended the discussions. I moved onto a sourcing funds from a private equity lender and got a much warmer reception, on much better terms. I wont be in a hurry to knock on that banks door again. I mention this because I suspect I’m not alone, our TBTF banks have just become inefficient sources of capital so they cater only to their captive markets.

A mate in business banking said he focuses on doing home loans for business customers as its a lot less work than funding a business and more profitable for him as he can meet his revenue and lending targets more easily.

And the answer is PE is very similar to VC, albiet usually at higher levels / later stages of a companies growth.

quotes from the document:

5.3. INVESTORS INVEST IN PRIVATE EQUITY
FOR HIGHER RETURNS
Sophisticated investors invest in private equity
because they understand it and consider that the
higher returns it offers, compared to less risky
investments such as government bonds, more
than justify the increased risk of the investment.
As well, the long-term approach of such investors
is consistent with the long-term approach of
private equity managers.
According to AVCAL research, the target for
private equity investment is to return 5% above
the return on public equity markets. Australian
private equity investment returns have been largely
consistent with this target (see table above and
quote on page 19).

5.4. HOW PRIVATE EQUITY FUNDS OPERATE
After a fund has closed (i.e. raised the funds that
will be managed), the managers invest the fund’s
capital across a set of investments that fi t the
fund’s investment mandate or focus. Once this
process is complete, typically after 3 to 5 years,
the fund is said to be ‘fully invested’.
Over the life of a fund, the managers will assess
hundreds of potential investments, conduct
detailed due diligence on perhaps 10% of these
but only actually invest in a small number, usually
around 10 to 15. Competition for investments is
fi erce and a fund manager’s bid will not always
succeed, in which case the time and money
expended on assessing an investment and
preparing an offer is lost. Additionally, owners and
managers of companies may reject approaches
from private equity, as is their right.
Private equity investments, unlike venture capital
investments, are fi nanced partly with debt from
third party lenders, rather than exclusively using
investment capital from the fund. The use
of debt has two important consequences:
– a fund can make more investments with a
given amount of investment capital; and
– investors can receive a higher rate of return
on the capital they have invested in the fund.

This is my understanding too, small business’s acquire finance from banks by mortgaging the proprietors’ personal homes.

Interesting in light of Aussie banks so well capitalised that Gina Rinehart obtained finance from the US government and in return, which I bet was a precondition by the yanks, she’s buying US locomotives. While that Aussie loco builder has zero orders. Is this a multiplier (not sure of the correct economic term) effect that Australia misses out on?

5.3. INVESTORS INVEST IN PRIVATE EQUITY
FOR HIGHER RETURNS
Sophisticated investors invest in private equity
because they understand it and consider that the
higher returns it offers, compared to less risky
investments such as government bonds, more
than justify the increased risk of the investment.
As well, the long-term approach of such investors
is consistent with the long-term approach of
private equity managers.
According to AVCAL research, the target for
private equity investment is to return 5% above
the return on public equity markets. Australian
private equity investment returns have been largely
consistent with this target (see table above and
quote on page 19).

5.4. HOW PRIVATE EQUITY FUNDS OPERATE
After a fund has closed (i.e. raised the funds that
will be managed), the managers invest the fund’s
capital across a set of investments that fi t the
fund’s investment mandate or focus. Once this
process is complete, typically after 3 to 5 years,
the fund is said to be ‘fully invested’.
Over the life of a fund, the managers will assess
hundreds of potential investments, conduct
detailed due diligence on perhaps 10% of these
but only actually invest in a small number, usually
around 10 to 15. Competition for investments is
fi erce and a fund manager’s bid will not always
succeed, in which case the time and money
expended on assessing an investment and
preparing an offer is lost. Additionally, owners and
managers of companies may reject approaches
from private equity, as is their right.
Private equity investments, unlike venture capital
investments, are fi nanced partly with debt from
third party lenders, rather than exclusively using
investment capital from the fund. The use
of debt has two important consequences:
– a fund can make more investments with a
given amount of investment capital; and
– investors can receive a higher rate of return
on the capital they have invested in the fund.
To ensure ready access to potential investments,
a manager develops and maintains a strong
network of relationships in appropriate commercial
or technical areas